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synchronicityII writes,

Rather than focusing on the costs, one could simply do the math and determine what the IRR is on a SPIA for every year one stays alive, and also use mortality tables to see what one's life expectancy is and what the realistic chances are of somebody dying at age 65 or at age 105.

That's what the Money's Worth Ratio calculation does. It calculates the net present value for the entire population of the annuity pool and compares it to the insurance company's quote. The difference is the insurance company's costs & fees.

If you use the Social Security Administration's mortality table, you get Money's Worth Ratios in the range of 0.70 to 0.80 -- meaning 20% to 30% of the premium is lost to the insurance company's costs.

Of course, the insurance company is using a mortality table that's skewed for adverse selection -- meaning the folks in the pool are living longer than average. Even if you spot them a four year delta (which is huge), they're still taking 10% to 15% of the premium in costs.

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